Apr 282004

An old joke has a grocer trying to explain business ethics to his son. “Suppose a lady comes into the store,” he says, “buys two dollars worth of merchandise, pays with a fifty, and leaves, forgetting to take her change. Here’s where business ethics comes in: do you, or do you not, tell your partner?”

Now a harder one, from real life. Suppose you own a second-hand store. You run profitable weekly auctions, the seller’s best friend, by gussying up a window with a few especially nice items and inviting customers to bid. One week you take two lamp bases, outfit them with new shades, and put them in the window, describing them, accurately, as lamps, not as valuable antiques. The lamps find two bidders, who both offer substantial amounts of money. As you wrap them for the winner you both notice price tags at the bottom of the bases, for an embarrassingly small amount, from an embarrassingly modern store. The winning bidder understandably balks at paying several times for the lamps what he would have paid for the bases and shades retail.

Here’s where business ethics comes in. What do you do? You can’t very well demand that the winner pay his bid, giving him a lecture on the subjective theory of value. It’s not gonna happen. Do you simply remove the tags and go to the underbidder, who hasn’t seen them? Are you obliged to tell the underbidder about the tags, which are now essentially public information? If you don’t, what do you tell the winner, now loser, when he comes back to the store, as he surely will, and asks what happened to the lamps? Do you have to tell him anything at all? Or do you ignore the underbidder and renegotiate a deal with the winner?

I honestly don’t know the right approach, and am curious what my readers think.

(Update: John Venlet comments.)

  20 Responses to “Business Ethics”

  1. Two total fools bid high amounts on something that was only represented as a mere "lamp" by a "second-hand dealer"? Do you call yourself an "antique" dealer?Did they have a chance to examine them? Is that really ALL that they knew: "lamp"? As the example is stated, you did nothing unethical at all, whether you tell anyone about the tags or not. If I put a painting on ebay, calling it only "a painting" and someone bids a million bucks, he’s an idiot and that’s not my fault.

    Of course, for one engaged in business, it would be sensible to tell both bidders about the tags–that is, for future business. But you did not lie or mislead or even suggest anything to be valuable about these lamps. They simply may have really LOVED ’em. Ethically: caveat emptor. Long-term goodwill: tell ’em both, even allow the sale to be withdrawn after full disclosure. Even if I wasn’t a "dealer" I’d let them know what I just found out and tell them they can withdraw their bids. But do I have to legally, even ethically? No way.

    Fools and their money …

  2. I don’t know the answer, but I am curious whether the result would change if instead of lamps you were auctioning off authentic Kwame Jackson autographs.

    P.S., Welcome back; we’ve missed you. And thanks ever so much for the link in your scansion post below.

  3. If the first bidder is nolonger willing to pay more than the second bidder, then go talk to the other guy and sell them to him instead. I’m with Valliant: caveat emptor.

  4. This is about risk and bargaining power, not ethics.

    You say to the winner, "Neither of us knows how long ago these lamps were originally sold. We can’t be certain that the store carries these lamps anymore, or if it does, that they are still sold for this price. It may be impossible to buy them brand new."

    Now, it’s possible that they’re available, possible that they’re not. You pause, and then address the winner, "Look. I understand you feel cheated. So, I’ll tell you what. If you want, you can take the lamps for the last bid you offered; if not, you can can take your chances that the store still has them in stock and for that price. In the meantime, I will sell them to the next highest bidder."

    If the high bidder declines to buy the lamps, you sell them to the next highest bidder, not informing him of the possibility that they might be for sale some place else for less; if he declines, find out whether the modern store still sells them, and either way put sell them again the next week.

  5. I was with Kevin, until the last paragraph. I don’t think the auction context adds anything to the central problem, or that the rank of the bidders creates any reason to treat them differently. Both bidders are similarly situated: they have made an offer that they might not have made had they been more fully informed. In fact, the wording of the problem ("you both notice…") implies that you, the seller, might well have informed the bidders if you had known.

    Now, each bidder has made a binding offer, and there are good moral reasons for them to honor it ("contracts are promises"). However, there are also good moral reasons not to make them do it ("don’t be an asshole"). The question of which norm exceeds the duty of its respective party probably comes down to context (e.g., does your store present itself as such an excellent judge of rare antiques that the very presence of an object in the window amounts to an assertion of value? Or did the buyers refuse offers to examine the objects more closely?) However, as Jim points out, simple business pragmatism may trump all this anyway.

    Since the problem doesn’t mention any time constraints or other considerations (e.g., your grandmother needs the lamp-auction proceeds to fund a heart transplant that same day), why not just inform both bidders of the new information and re-run the auction? If you really want to wring out every last drop of moral optimality, I’d say that first you inform the two bidders and run a sub-auction only between the two of them, in deference to their earlier interest, and if both of them decline to bid at all, then you run another public auction, changing the description to something like "Lamp bases from unknown modern store".

  6. I’d say that as long as you didn’t misrepresent the lamps as antiques, your best move would be to inconspicuously remove the old tag.

    The worth of a thing rests mainly in the buyer – if he’s happy with the deal, so should everybody else.

    The paradigm of business is to sell things at a profit.

  7. I pretty much disagree with everyone so far. In most spheres of commerce, other then where fiduciary duties are being vended, it is the moral duty of the seller to soak the unserious, the unprepared and the stupid.

    The very avatar of morality in business is the psychic hotline. It extracts capital from the credulous and gives it to the cynic, who will, hopefully, deploy it in a manner informed by how the world really works rather than by how one would like it to.

  8. I agree with those who believe that even in the absence of fraud or misrepresentation, other considerations (e.g. the business’ reputation) could trump the outcome otherwise generated by the principle of caveat emptor. Perhaps the following counter-factual makes this more clear. If you turned over the lamps and discovered they came from a well-known antiques shop and cost far, far more than the highest bidder had bid, you couldn’t rescind the sale without appealing to the buyer’s "moral" sense that the sale was somehow "unfair". In other words, the buyer clearly would have no obligation to pay a higher price just as the seller in your example would have no obligation to rescind the sale, sell the items for a lower price or inform anyone else of the lamp’s "real" worth *unless* the seller believed it would be harmful to the future of his business or his sense of self-worth.

  9. Forgive me, because I have been reading Jane Austen lately, and this discussion makes clear how much has been lost by replacing manners with morals. Manners would encourage honesty, which means more than just telling the truth. It means endeavoring that the truth be known. No contractual arrangement demands this endeavor, nor could any coherent system of ethics, but living well with others does. So, I would agree with those who have said it would be prudent to inform the second bidder, but I think the matter goes beyond prudence. To act kindly to the second bidder under the assumption that it will generate future business is too hopeful. What is not too hopeful is the idea that acting kindly towards others, when accepted as a general rule of human conduct, makes getting by a little easier for everyone.

  10. Business is business, and manners are manners.

  11. I’m just a 17 year old high school dropout so I may not know much about this subject, but it would seem to me the first thing we need to do is ask ourselves a basic question: What do business ethics entail? Obviously part of it is moral obligation to the customer. Is that all though? No, you have an equal if not greater obligation to the business itself, which is to make the most money you can for it. These two things often conflict, which is what makes this such a tough question.

    On the one hand, you have the moral obligation. Can you keep the first bidder’s money once the deal has been made? Absolutely, you misrepresented nothing. The value on the tag is NOT the actual value of the lamp. Why? Because there is no such thing as an "actual value." The price that the bidder offered for it is an equally "correct" number.

    On the other hand, you have your obligation to your business. In the long run you are actually hurting your business to not offer the first bidder a refund since if you do not he will never come back. Based on the full definition of business ethics you cannot force the first bidder to stick to the deal because you wouldnt be doing justice to the business.

    So what is the solution? Give the first bidder a refund and sell the lamps to the second bidder. Again, you are not forced to tell him the issue with the tag as that is totally irrelevant. Would you also be forced to tell him your opinion on what the value of the lamp is? No, that is totally ridiculous, yet is just another opinion of the value of the lamp, exactly what the tag is.

  12. As a perfectly stand-alone transaction, the answer is to demand the full amount bid, regardless of any external indications as to worth.

    However, since you’re presumably staying in business after this one transaction, you have to consider past and potential future transactions with this client, and anyone he might influence.

    I guess what I’m saying is you need to maximize your profit in the time-frame that makes sense to you. So, like, it depends.

  13. Aaron, you’ve mentioned that this example came from "real life." So my question to you is, how did the real-life shop owner resolve his/her dilemma?

  14. Eddie:

    The substitution of "manners" for ethics is as hideous an idea as I’ve heard of late. I have no obligation to make anyone’s life ‘easier,’ any more than anyone has an obligation to make mine ‘easier.’ I am best served when everyone pursues and maximizes his or her own self-interest. I will work for my long-term interests by showing my customers that doing business with me is to our MUTUAL advantage. If I cannot offer such mutual selfishness, I’d best not interract AT ALL–with anyone under any circumstances. If both of us are not gaining from the interraction — LET’S NOT DO IT!

  15. Tim: The saga, in real life, continues. Stay tuned.

  16. Jim,

    You are absolutely right that you are under no such obligations, but that proves very little. I certainly am not advocating coercing you into making life easier for anyone else, although I would hope you would show some respect and gratitude if someone were to do it for you anyway. It might surprise you to discover that others wish you well and sometimes even know what you need better than you do.

    I am making two points. My first point simply is that moral codes, like legal codes, describe minimal conditions of conduct. This is as it should be. (Take this as evidence that I’m not saying that manners should replace morals either.) There is a place, however, for a discourse that talks about what might be done beyond the minimum.

    My second point is that trying to calculate good will too narrowly is counter-productive for everyone. Toqueville calls this "self-interest, rightly understood." Acting for the benefit of others, with the expectation that benefit will at some point come back around to you, might not satisfy all moralists, but it satisfies me and I don’t understand why it wouldn’t satisfy you too.

  17. Manners always involve other people and a concern for their well-being. Ethics would still be necessary (even more so) for someone lost alone an island somewhere.

    Ethics are not, for me, a set of "minimal standards." Morality is the science of maximizing my success and happiness. Moral conduct requires the constant effort to harder work, engage in more careful thought, etc.

    Benevolence to others is an important part of this, and, therefore, a moral virtue. But it is only one part, and it cannot be achieved at the expense of my life and happiness. Ethics comes first and, indeed, should inform the development of proper "manners."

    "Manners" includes the trivial and, for some, the dishonest (e.g., the telling of "white lies," etc.) Ethics never does.

    The existing convention about "good manners" is sometimes not even benevolent to others, in my view.

    You may be surprised to hear that even my Christian friends regard me as unusually kind and generous and, in particular, well-mannered.

    But this is the logical result of ruthless selfishness and strict ethical conduct. I never let the "feelings" of others get in the way of doing the right thing. That spells disaster–every time.

  18. What actually happened was: the first bidder bailed. The price tags were removed and the second bidder was called. She hemmed and hawed, asking, "why are they so expensive?" (um, maybe because that’s what you offered?) and then demanding more time to decide. The third bidder was called, and bought the lamps. The second bidder called back, wanting to buy them after all: too late. The first bidder has yet to be heard from.

    The moral, if there is one, beats me.

  19. "Caveat emptor" has been thrown about. It’s a general principle but with limitations.

    One who is in regular business (and with some variation in the type of business concerned) is presumed, at law, to have an informational and technical knowledge advantage over the buyer which he may not use to the disadvantage of the buyer. To do so exposes such a dealer to both criminal and civil action at law. Thus, a car dealer is legally obliged to reveal details of a car’s condition, etc., which would influence the buying decision or price of a normal buyer; landlord must inform of difficulties with heating or plumbing, etc. Of course, to a great extent, there is a burden on the disappointed buyer to show that the defect had actually existed at the time of the sale and that it was of a type of which the dealer, as an expert, should have known.

    There is a somewhat related law dealing with contracts such as leases, etc. The thrust of the law is that if the contract offered has been written by one of the parties (or, as is frequently the case, is a standard contract offered by one party to the other), any dispute arising from ambiguity in the languge of the contract must be resolved in favor of the interpretation drawn by the party who did not write or offer the contract (on the basis that the writer or offeror had full opportunity to have corrected any possible duality of interpretation.

    In the example, even if previously unaware of the lamp’s origin or selling price, a dealer relatively expert in such goods, upon learning of these matters (and assuming further that such goods were routinely available elsewhere for less) would be obliged to explain those details and to release the buyer from his offer. He could very well offer the lamp at something akin to the "going" price or less or solicit his rebid.
    If dissatisfied, he could (lthough under no obligation) solicit a rebid from the previously outbid
    seeker but would now be under obligation of providing full descriptive information of the type provided the high bidder.
    Removal of the tags would be, if known, prima facie evidence of fraudulent intent except in the case where the tag was merely that of a wholesaler–there would be no obligtion to exhibit that information.

    Petty fraud in such matters is extremely common–that doesn’t make it legal–or ethical. In Mexico, a large trade used to be carried on along the border in Indian artifacts (such as arrowheads, stone axes, etc.) displayed willy-nilly on a "junk" table. Tourists bought these items in the expectation that they were buying "antiquity" when the things are turned out by current craftsmen. I see very nicely made antique furniture occasionally–fresh out of a container from Indonesia.

    I would remind that, regardless of the law, "caveat" should always be the rule for the "emptor". It’s rare that the cost of making yourself "whole" at law is worth the trouble and expense, even when successful.

  20. I see that many dealers on E-bay are very careful to not, sometimes with drawn-out explanation ("Im just working my way through college by offering
    goods consigned to me by others and don’t know anything beyond the information provided," etc., etc.). In general, I’d suppose such disclaimer to be a red flag–but certainly not always. I’ve bought maybe a dozen or two things with only one disppointment and that mostly my fault for not examining and notifying the seller of the (condition) discrepancy until months had elapsed.

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